Saved by the mining boom

The magic result of above trend output growth, rapid productivity growth and stable prices – revealed in national gross domestic product data last week – is due to the mining boom.

Real output grew 4.3 per cent last year, output per hour worked grew 5 per cent in the market sector, while output prices fell slightly.

I suggested this high growth, high productivity and low inflation combination was possible in the paper I wrote earlier this year for the Minerals Council of Australia, Maximising Growth in a Mining Boom.

Last year the Reserve Bank of Australia argued that if output grew above trend, inflation would rise above its inflation target band and rates would need to rise. Instead, output has grown above trend, yet the private consumption deflator has been flat for two quarters, helped by the high Australian dollar and the competitive pressures from the near recession in non-mining sectors.

Of that 4.3 per cent output growth, the mining sector provided 1 percentage point and, on my rough estimates, mining investment and other mining related sectors around 1 percentage point each.

The other 80 per cent of the economy grew about 1.5 per cent. In regional terms, 75 per cent of demand growth was in the resource states of Western Australia, Queensland and the Northern Territory, which make up only one-third of the economy.

Two-thirds of the nation provided only 25 per cent of demand growth. Private consumption was particularly strong in the resource states, where employment and incomes rose most.

More than half the net new jobs created last year were in the resource states. By sector, employment in mining, construction and utilities grew about 4 per cent, as did public sector dominated health, education and public administration. Employment fell in private non-mining related sectors, with 62 per cent of jobs.

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The strong productivity growth reflects the switch of jobs into the high-productivity mining sector. In addition, the squeeze on profits and slow demand growth in non-mining sectors is pressuring non-mining firms to shed labour, reflecting not only the high Australian dollar but, unrelated to mining, slow credit growth, falling house prices and internet competition in retail.

The lesson is that Australia’s economic speed limit is faster than we thought. Output was boosted by the recovery in coal exports from the floods, so underlying output growth is nearer trend, but inflation has fallen, not risen.

We should continue to aim at above trend output growth, while keeping a wary eye on inflation pressures due to the carbon tax and wage claims.

This is not bailing out particular sectors, but ensuring the economy and employment grow as rapidly as possible, while keeping inflation subdued.

What about the future? Aggregate output can probably grow near 4 per cent without major inflation pressures.

The mining and related sectors could provide output growth of 2.5 per cent, public sector output and employment growth will slow, and private non-mining sector output can probably grow above 2 per cent a year, without causing major inflation pressures.

Given falling asset prices and the uncertainty created by Europe, lower interest rates were needed to prevent the non-mining sector slowing. While employment growth has picked up recently, hours worked remain weak.

I suspect there is strong growth in mining-related employment, while non-mining firms have cut hours worked. If non-mining output growth remains weak there will be more layoffs.

We need policies to keep output rising even if mining prices fall. Lower construction costs are needed to keep mining investment growing. Skilled migrants are needed to fill skill shortages. We need to improve labour force mobility, so more Australians can shift into highly paid mining jobs. Fly in, fly out workforces help Australians who do not want to move their families to remote mining towns work in mining.

In the longer term, the Productivity Commission should study barriers to labour force mobility.

Finally, we need to encourage adjustment in the slower growing non-mining sectors by reducing costs and introducing more flexible work practices, so more firms can stay competitive despite the high Australian dollar.